Q3 2019 Earnings Call
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For care Speaker today, David Climie, Vice President of Investor Relations. Thank you. Please go ahead.
Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast on the call today's can't Sexton, President and CEO and Dave Mclennan, Our Chief Financial Officer. As a reminder, today's presentation is being webcast and will be available on our website. Following the call today's agenda will be as follows gable provided detailed overview.
Our third quarter 2019 results get will then provide his corporate update and then Dave will provide comments on a full year guidance along with an update on our cost reduction program followed by acuity.
Before we get started I will reference the company's cautionary note regarding forward looking statements a summary of our cautionary notes can be found on page two of the webcast and is now being displayed today's presentation contains certain statements in information that are not based on historical facts constitute forward looking statements within the meaning of applicable.
Securities Laws. These statements include our financial guidance statements about our strategy goals objectives and expectations and commentary regarding the outlook for our business are forward looking statements are based on a number of material assumptions, including those listed on page two of the webcast presentation, which could prove to be significantly incorrect. Additionally.
Forward looking statements are based on her managements current expectations and we caution investors are forward looking statements, particularly those that relate to longer periods of time are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our forward looking statements.
I draw your attention to a longer discussion of our risk factors in our area and management discussion and analysis, which can be found on SEDAR and Edgar as well as other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release with that I'll now turn the call over to Dave Mclennan.
His review with the third quarter results. Thank you David No. We report our financial results and U.S. dollars and on the U.S. GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance. The full reconciliation between GAAP and non-GAAP results is available on our website.
Total revenue in the third quarter was 174 million down 14.5% compared to Q3 2018. This level of quarterly revenue was below our expectations due to lower demand for certain hardware products, which I will which I will review in more detail shortly.
non-GAAP gross margin a third quarter was 31.7%.
From 30.8% to the prior quarter.
Our non-GAAP operating expense in Q3 was 53.3 million down $3.2 million year over year from Q3 2018.
The Q3 results reflect realization of savings from our cost reduction initiatives, partially offset by selective investments being made to grow our subscription based services business.
The investments we made in Q3 were largely focused on go to market initiatives in the areas of sales and corporate marketing.
Our GAAP operating expenses in Q3 included restructuring expense of 6.3 million associated with our cost reduction initiatives.
Our non-GAAP net income was 1 million or three cents per share compared to 10.5 million. There were 29 cents in the same period last year.
We have two reporting segments, I O T solutions and embedded broadband.
Oh I OTI solutions segment is comprised of horizontal and vertical services as well the gateway a module hardware products that provide our customers with fully integrated Aiotv solutions.
This reporting segment is focused on providing highly differentiated device to cloud offerings that generate high margin higher value end to end solutions.
Within the segment in the third quarter, our services revenue increased 5% year over year and within that the recurring subscription portion was up 7% year over year.
This year over year comparison excludes the revenue from the I tank monitoring business, which we sold in December last year.
Our enterprise Gateway and better revenue grew 14% year over year well. This is strong growth. It was not as strong as expected due to several factors, including several large scale customer upgrade projects being delayed at some customers deferred upgrading to 40 as result of the Threeg network Sunset being extended we.
Also saw some excess inventory in the North American distribution channel and experienced reduced demand from one of our telematics Gatwick customers in Asia Pac.
This growth in services in gateways was offset by year over year decline in the lower margin module hardware products in this segment, including a sharper than expected decline into Gn Threeg embedded module sales as our key customers premier prepared to move to Oh, PW way, we'll fourg solutions and some divan.
Softness in Q3 in the areas of security energy.
As a result, I OTI solutions revenue was down 2 million for 2% year over year to 93.4 million.
In Q3, VIP solutions segment was 54% of consolidated revenue.
Sales in our embedded broadband segment, which is comprised of our high speed cellular modules, primarily used in automotive mobile computing and networking markets, which typically don't provide the opportunity to provide an end to end solution declined 25% year over year to 80.6 million.
This decrease reflects the expected weaker demand from our mobile computing and networking customers year over year as we complete certain programs with these customers and weaker industry wide demanded automotive combined with expected delays in the launch of new high volume programs, including certain Volkswagen platforms.
In Q3, the embedded broadband segment was 46% of consolidated revenue.
Looking at non-GAAP gross margin in Q3 total gross margin was 55.1 million for 31.7% in Q3 compared to 67.3 million or 33.1% to the prior year.
On a sequential basis compared to Q2, our gross margin percentage approved.
Solutions gross margin was 37.7% up from 37.2% in the second quarter and embedded broadband gross margin was 24.7% up from 24% in Q2 results in a consolidated gross margin of 31.7% up sequentially from 30.8% in Q3 adjusted.
EBITDA was 6.3 million compared to 16 million a year ago.
Moving onto the balance sheet during the third quarter cash flow from operations was $8 million capital spending in the third quarter was $5.3 million, resulting in free cash flow of 2.7 million and net increase in our cash balance of 2.1 million to end the quarter with $87.1 million as cash.
With that I will now turn the call over to Ken to provide a corporate update Ken.
Thanks, Steve.
I've been laying up for the past year path to value creation for our business and shareholders by transforming twin aisle T. solutions company with recurring revenue driven from Aiotv conductivity software and managed service offerings from a mostly hardware only company.
We've made strong progress in our transformation and I will highlight our I O T solution success in Q3, as we experienced accelerating momentum and had a record quarter for new recurring service wins.
At the same time the hardware only part of our business has been challenging and has delivered revenue below our expectations.
We continue to make progress towards our announced target of 200 million an analog annualized recurring revenue by the middle of 2022, and 400 million by the middle of 2024. This underpins our long term value creation strategy.
We are focused on building a recurring revenue business as it creates greater predictability and a flywheel of accelerating growth.
The challenge is that it takes time to build significant volume of recurring revenue units into the market.
To help in measuring the long term impacted the new recurring revenue business. We are generating we measured the lifetime value of by recurring revenue wins to provide visibility future recurring revenue.
The lifetime value of recurring service wins in Q3 continued to accelerate and was more than twice the value wins in the second quarter. This year.
And the cumulative value wins in the first nine months of this year was 170% of all of 2018.
Im pleased with the service win rate as we transform our business and we're on track to capture the service wins in Q4, two achieved the 400 million to 450 million range of LTV of design wins in 2019 that I'd said as our target at the start this year.
The design cycle of our business means the service wins, often take 18 to 24 months to start contributing to our PNM. So while you don't see this progress in our current TNL, there was increasing future value in our delivery pipeline.
It is this level of record activity and with many conversations with customers that gives me confidence they are seeing value in our integrated end to end I O T solutions, and we are getting solid traction the sectors of the Iraqi market that we are focused on.
T solutions into the industrial Iot market.
And gateways and high OTI enterprise networking.
And we see this progress growing with more higher value and predictable recurring revenue design wins as our current sales pipeline from recurring revenue opportunities has tripled from the beginning of 2019.
In the first nine months of this year, we have added close to 300000 net new connected devices and now have close to 3.5 million aiotv connected devices globally, which is up 9% from the end of 2018.
The major contributor to that growth has been the uptake of our Crs Smart Sim, which has really accelerated this year and reflects our higher valued customer wins with device plus services.
The smart Sim connection rate is driving our strong overall growth despite some attrition and devices in our legacy vertical businesses as expected.
We had many strong solution wins this quarter and a good example is our win of a public lighting company based in North America, that's deploying our HLC 7800 cat M.L. PW, a module as well as our Crs smart Sim to connect each of their lights standards enable them them to sell smart city lighting platforms as a.
Solution as a service.
This win is certainly good for our LP W.A. module business, but more importantly, it will help drive our subscription based service revenue as we provide the customers more than 200000 smart some connections in its first deployment.
As a global provider of smart lighting, the customers focused on five geographic regions and this is a major reason why they selected Sierra because our smart Sim makes it easy to deploy biotech on activity around the world.
This was a competitive process and our wind shows the value of our bundled solution to customers. We do expect their volume to increase overtime as they shift away from RF mesh networks to cellular connectivity.
Behavior. We're also seeing at many of the smart metering companies.
When such as this and others. This quarter will contribute 1 million to 5 million an annualized recurring revenue as they are fully rolled out.
Another win this quarter was an enterprise networking customer looking for managed connectivity to enable a global consulting climate client that is growing its business.
We were able to provide an airlink gateway.
Bundled together with connectivity services and managed uptime through our 24 by seven network operating center in Atlanta.
This solution is a perfect example of how we can significantly reduce a customer's deployment risk speed up the time to deployment and scale from a north American roll up till worldwide deployment.
Our solution eliminated any end to end integration issues and going forward they will be using our multi MZ smart Sim for international services, and providing strong revenue per device of $35 per month.
The industrial IR team market has not growing as fast as market predictions.
And my discussions with existing and prospective perspective, industrial Iot T. customers. Many many have expressed frustration with how long it takes them to deploy their loyalty programs.
Some customers might start with individual parts of the solution, but they often don't have the internal teams are capabilities to implement a fully integrated aiotv deployment.
In fact studies show that today over 70% of Aiotv projects have failed because of the complexity. There is that is involved.
That's where our fully integrated end to end I O T solution, including the Aiotv device cloud management connectivity and security makes their deployment simple and scalable.
We took a major step in this direction with the announcement in mid October of the general availability of our octave all in one edge to cloud solution for connecting Aiotv industrial assets.
Uptake goes a step further in simplifying and de risking aiotv deployments for our customers. It provides edge to cloud data orchestration and while at the same time, providing connectivity and security that is fully integrated.
Octave enables companies to get applications up and running within days instead of month, giving them access to equipment data as it allows him to maximize machine performance and uptime reduce maintenance costs and transform their business model.
A recent report published by Forrester Research estimates that companies can get their aiotv deployments to market up to 12 months sooner and reduce their overall biotech project cost by more than 40% using octave compared to sourcing discrete solutions.
I was attending our innovation summit in Europe last month, where we had a record number of customers and developers demonstrating a leading edge Iot applications.
Maybe ill one of our customers a leader in environmental waste management in Europe has incorporated octave into its proprietary smart vital waste collector for exhibit though it didnt have the dedicated resources to solve their issues. So they simply relied on Sierra and the Optive solution to link the bio waste equipment to the cloud in record time.
And without any development or installation risk.
Being their time to market increasing their ROI on their connected waste management installations.
In the third quarter, we integrated octave into the Microsoft is your platform and secured our first octave wins, including our first end to end octave Microsoft is your customer.
This individual customers in the smart building sector and its connecting ventilation systems to improve uptime performance and preventative maintenance.
This use case demonstrates how octaves edge to cloud data orchestration integrates perfectly with is your for customers Aiotv analytical requirements. We're working closely with Microsoft on our joint go to market plans for 2020, which will include joint marketing a sales activities and C and we see significant future growth opportunities.
My collaboration with Microsoft emptying their preferred edge solution partner.
So with our record design wins are improving opportunities pipeline and our new Aiotv partnerships, we remain focused on delivering high recurring services revenue.
As announced in our Investor day in June of this year from our current annualized run rate of 100 million. Our objective is to deliver 200 million at higher margin recurring services revenue in three years time, and then double that to 400 million recurring revenue over the ensuing two years.
To further expand our I O T services and solutions business today, we announced that we have signed an agreement to purchase the M and group in Australia, or 19.8 million to expand our I O T solutions business in the Asia Pacific region.
And to M. has a strong history of Aiotv leadership in Australia.
They are focused on growing their io Te connectivity services business and they also sell our cellular gateways and modules.
The business has an excellent strategic fit with our I O T solutions business, because slightly more than half the company's revenue comes from subscription based recurring revenue.
And this part of the business has been accelerating nicely over the last three years.
Mmm group's revenue in the last 12 months was us $17.9 million of which 9.2 million was recurring subscription revenue.
And we expect the acquisition to be accretive to earnings immediately following closing in early 2020.
The MDM group has a solid platform for us to increase our I O T services and solutions in Australia, as well as expand into other new regional markets, such as New Zealand and Southeast Asia.
So while we're on track to grow our I O T solutions business enhanced by the purchase of the MTM group.
We're also seeing some weakness in our hardware revenue as Dave noted in his earlier comments.
In certain areas of our embedded modules business, we're being impacted by the accelerated slowdown in both the auto and PC markets as well as low cost competition in our module space.
While we anticipate addition, our transformation strategy it is happening in some areas faster than we thought.
Countering this our integrated device to cloud solutions are differentiating us from module, only suppliers and allowing us to win in the industrial Iot T. segments that we are targeting.
And we continued to grow strongly and pick up market share in the enterprise market.
So with a record design wins are improving opportunities pipeline and our new Aiotv partnership we remain focused on delivering higher value recurring services revenue.
Growing our current annualized run rate of 100 million of services revenue to 200 million higher margin recurring services revenue in three years time, and then double led again to 400 million in recurring services revenue over the ensuing two years.
I will now hand, the call back today for the outlook for 2019 and his comments on the solid progress that we're making on delivering or 40 to 50 million in cost reduction initiatives Dave.
Thanks, Ken I will now provide an update to our full year guidance and some comments on the fourth quarter.
In Q4, we expect I OTI solutions segment revenue to increase sequentially based on growth in our enterprise solutions Gateway business and improved demand in our integrated modules business. However, we expect to growth in IP solutions will be more than offset by a sequential decrease in our embedded brought that segment.
Due to a continued decline in our mobile computing business and lower demand for networking customers.
For our full year 2019 outlook. We are now expected to Aiotv solutions segment revenue increased approximately 3% to 4% year over year and embedded broadband segment revenue to decrease approximately 20% to 23% year over year, resulting in full year 2019 revenue between 708 and 700.
12 million.
As a result, we now expect adjusted EBITDA in 2019 to be approximately $23 million and non-GAAP EPS to be in the range of zero to three cents.
Before we move on to Q today, I would like to provide a few comments regarding the progress being made on the cost reduction initiatives in 2019.
We're on track to meet our target of reducing cost of sales and operating expenses by approximately $40 million to $50 million as we exit 2020.
In the first half of the year I spoke about initiatives underway, including consolidated R&D and the number of global design centers reorganizing our go to market approach into a single sales and support are going to organization.
Sourcing certain business processes and in the areas of finance.
In HR activities and renegotiating, our agreements with our contract manufacturing partners.
In the second half of the year, we've continued to implement new initiatives focused on product development efficiency gains based on further consolidation of R&D and product management teams and additional reductions in cost of goods sold including further reductions in our contract manufacturing costs.
We estimate these additional initiatives will provide approximately $9 million of savings once implemented bringing the total estimated annual savings to approximately 32 million once fully implemented.
Offsetting this sort of some selective targeted reinvestments in go to market, an R&D that will drive growth and product areas such as LBW a in fiveg as was our higher value identity solutions.
This concludes our formal remarks. Thank you very much operator, we can now we'll open the call for the acuity session.
To ask a question. Please press star one telephone keypad. Your next question comes from Mike Walkley of Canaccord Genuity. Please go ahead. Your line is open.
Hi, This is actually a happy on for Mike.
In terms of the impact to the accounting adjustment this quarter's results as well as 2019 guided.
Reduction from previously how much was the accounting impact and is there potentially a catch up later on when.
This impacted revenue may be recognized later.
I'm, sorry, I'm not I'm not following you on the accounting impact could you could you just elaborate please.
Yes sure in the relief.
Third quarter results reflect adoption of the CH 42, just wanted to know what the impact of that was a result as well as guidance.
Oh, Thats I leave standard.
Mike and it's a it doesn't have any PML impact.
Okay got it.
And then just given the revision on the guidance is your three year.
Your long term guidance still intact.
Yes, hi can't here, so we've been focusing on driving the transformation to Aiotv solutions and higher recurring revenue so as I highlighted our design wins in the.
Services aspect the ITC solutions were strong and yes, we remain on track for that.
Shortage the challenges we've seen it been in some of the module only.
Areas, our business as well as previously mentioned PC, OEM and a and automotive so we.
Where.
We were we have done the differentiation to talk about Aiotv solutions in the drivers of growth and nowhere those areas there are going well.
I brought to light some customer examples because we are winning good business in those areas with very strong recurring revenues that.
As I mentioned takes time to get from design win through into units in the field and showing in our recurring revenue, but not part of the business is strong.
Got it.
And last one from me out that's on the Q.
And Tim acquisition.
Given the January expected close.
What do you expect in terms of the contribution next year will they be ramp.
Synergies.
Baked into the accretive guidance.
Yes, I think we sized it for you win in Ken's comments in terms of the trailing.
The trailing revenue and.
And within that recurring revenue side of things than we do expect some growth off of those numbers in 2019.
I would add that the.
The business will be run stand alone and we you know it's been running at about mid teens EBITDA margins and we would expect to continue to run it at around that level.
And it will be accretive right away when we close.
Got it.
Your next question comes from Sandals shuffling of BMO capital markets. Please go ahead. Your line is open hi, good afternoon.
The real as might be but early you talk about 2020, but just help us understand directionally up some of the hardware headwinds.
When you might see them start to resolve.
So I guess Pcs and networking will be challenging for awhile.
But would you expect autos to start improving for example in the first half of 20 on back of ramps.
Right.
I'm sure I'll start off Thats canton here and I'll pass it onto Dave I think that no we're not giving 2020 guidance, yet, but certainly you're modeling some of the trends we had highlighted previously that.
The PC OEM area, where we had a couple of design win losses.
And Weve completed shipping products too.
Lenovo and gallons so.
Those come out of our numbers.
You are seeing that this quarter and that will be continuation into 2020, Ondeck counter side of that we're seeing good growth in our I O T solutions business with strong growth in recurring revenue continued strong growth in our on our enterprise business. So.
I would see solutions growing and embedded broadband declining on a year on year, but Dave any further comments I think those are the trends.
If you just clarifying the commentary regarding the decline in two to three g. as customers are transitioning to forging dopey repeatedly way when does that start to alleviate.
Yes, I think you know that business is getting smaller and smaller I hate that that that slows down.
As we get into 2020.
I will say with the extension of some of the Threeg networks will probably be.
Active and in Threeg products through 2020.
Okay.
And then as far as.
Gross margins in Q4, or how should we think about that.
Directionally compared to current corner.
Yes, I would expect some modest improvements sequentially Santos from where we were in Q3, you a little bit on mix improvement.
Coupled with cost reduction initiatives.
Should see us modestly up sequentially.
Okay, and then finally as far as M&A would you be looking to continue making more connectivity acquisitions or now with the M. M. Do you feel that you have the coverage and he's done a global basis.
Yeah, you know previously the company acquired two MB knows in Europe , and two in North America, and I said previously that got us to scale in those markets as weve been winning more global customers that look for us to be able to provide connectivity devices wherever they ship in the world we needed to strengthen our position in.
In Asia Pac and so this really fulfill is that I.
I am just on a very good job in that market and helps us get better conductivity volume and scale in that region and and expertise as we work to have.
Continuation extension of of carrier relationships, we have around the world. So.
This was smaller in scale and some of the other ones and and fit a specific need so no. We're not on the on the trail for further spread. This this was a very good strategic fit as noted Ari distributing our products and.
A good relationships. So we expect this too.
You have to build nicely with our business and we see good opportunities in the Southeast Asia region.
Right up front line bucket.
Your next question comes from Todd Copeland I'd see Ibcs. Please go ahead. Your line is open.
Hi, good evening everyone.
Hi, Tom maybe you said this but I missed it so I apologize if you did.
What is the current run rate annualized run rate of your recurring revenue and what's been the growth since the analyst.
Sure. So we did we did mention in the script that are.
Recurring revenues up 7% year on year, I think it was up 3% sequentially in the quarter.
Right and.
Sure.
In the.
The elements that are that are picking up are accelerating as we why we brought to light for the first time of the net new connected units that showing strong growth by our smart Sim. So that the elements are driving that recurring revenue are picking up nicely.
And we'll see that continue through Q4 in 2020.
Just to size that absolute dollars for your taught the the total service revenue in Q in Q3 was 24.6 and within that the recurring subscription on that was 23.5, so as Ken mentioned that that recurring amount was up 3% sequentially and up 7% year over year.
Okay.
And did I did I hear this correctly that your baseline was at about 100 million. When you started this journey, so you're a little bit low below that analysis, that's just seasonality or.
What's what's the bridge, yes that 100 million did have when we bought numerex.
They did have a a.
Small hardware component in their revenues. So I think that's what you may be referring to is that that included that small revenue.
So we're a small hardware component of the Numerex verticals. This is this is pure.
Pure.
Services revenue that referring to so to put that in perspective in 2018, it was about annualized $90 million to $92 million of.
Service revenue in 2018, and as I've said targets, both for our company and for the market I've rounded.
Todd So 100 to 200 to 400 is is what we're out to achieve and so we were slightly below the 100, but we are.
I am just using that broadly is our starting point, yes, thats, our and I'm actually not picking on it I was just trying to figure out the where where you were in the third quarter relative to that.
Okay, that's fine and then.
Sometimes from other SaaS companies, we here.
Recurring revenue plus committed revenue or backlog if you will.
Is that something you've thought about disclosing to sort of give us an idea on.
What you might have looked on top of the 100 million to give the I guess stepper view towards that 200 might be something doesn't sound like youre disclosing and now you've just given hands here or there, but admitted or contracted revenue might be something to consider putting out there. So we can sort of bridge.
To bridge toward that.
And then the duration on it and start to bridge toward that 200.
Thanks, very much share so what we what we what I, what I brought out which is new to our.
Reporting for visibility is this LTV of design wins. So it's meant to capture that is meant to capture the.
Recurring revenue. So they said, we'll we'll add 400 to 450 million of lifetime value of recurring revenue from new design wins in 2019, and that's revenue that will.
It will show up in future years.
So when you have.
Many SaaS companies you will have a.
A piece of business that's going to.
Come in at X value per year unique things about our businesses, we when a customer like the lighting customer I mentioned as they shift more products. Each year you mounted recurring revenue continues to increases the number of products in the market continues to.
To grow every year based on their shipments. So we go to get the benefit of recurring revenue, but also as I called the flywheel of with a winning a new customer that level of revenue grows as they continue to ship their products into the field.
And is there is there any duration on this for 50.
Yes, we look at a <unk> based on the product type we have the number of expected years of service.
By product type so between.
Three to five years in the main of of service, what we will find we talk about.
Just rely on t. customers the product will be there for the generation of that machine. So when we are in industrial laundry machines. And example, we've talked about for those law firm be in the market for 10 plus years, but we we don't.
We don't take our Ltd calculations that were more conservative than that.
And if we just simplistically if we were to divide the 450 by five that's 90.
Then it would we then add that too.
Recurring revenue that you have as of Q3.
So.
The you wouldn't desire, we would divide by lesser number than five so it's a it's a bigger number then the 90 of annual recurring revenue that we will have one off of this year.
By you can't add that all to 2020, because it takes as I said 18 to 24 months to get that into production. So.
When we win.
We are working to try to help customers get to market more quickly, but they'll often do.
Task and their systems up and running and sure. The integrations are modules starts to ship built into their product and then after 12 months of shipping will have 12 months worth of devices, giving us recurring revenue, so thats, where we take a look at so if you're.
Taking that design wins, and saying, it's a 100 plus million of annual recurring revenue added to our picture.
A couple of years out and that's that's more of the way to look at it that's the signal you're trying to sense.
Okay. That's fine one last question so.
You've given us the recurring revenue you've given us once you've added what is rough churn rate. We should think about over that couple of years as we sort of come up with a net number.
Yeah, No churns all of these very important in recurring revenue businesses. So in the industrial Iot T. segment, the churn rate tends to be very low cost event truck roll to ever go out and voluntarily switch something out is so high that youd you don't see that behavior.
And it really then is on the on the life of the machine. So in most industrial I have a t. segments. We go that churn rate is is very low we have some other segments of our business.
Where we have managed connectivity service et cetera that will tend to be shorter life and can have slightly higher churn rates, but the main.
Big segments, we're going after and industrial Aiotv are very very low churn rate segments.
So single week single digits overall.
Yes.
Really appreciate the color three lower.
Your next question comes from Paul Treiber of RBC Capital markets. Please go ahead. Your line is open.
Thanks, so much good afternoon.
Just in regards to PC OEM segment, you spoke about pursuing.
Hi, good new design wins in that space, how is that progressing should we expect a rebound in that business in 2020.
So we talked about before the next design cycle would be typically around fiveg.
I think you'll start to see Fiveg have more of an impact in 2021, and some first shipments are going to happen in 2020, any aiotv segment, but not to but not substantially so.
PC OEM, how will be similar to Q4 run rate throughout 2020.
Okay. Thanks, that's helpful. And then yes, I imagine the majority of the decline in product revenues is volume related can you speak the trend that you're seeing in may and speeds.
Well I think that some of the ASP and I'll, let Dave coming here in and then it but some of ASP is based on.
Different classes of product so a.
LBW a module is circa sub 10, dollarsfour sub $10, whereas a cat one device, maybe 20, and then the higher bandwidth modules.
Much higher in price so that there's mix there in our gateway business, where between 300 $500 per per gateway. So.
The mix by.
Bye Bye devices is certainly influenced on volume, but David ownership of the comments on ASP, Yes, let's say you know other than other that LP Wu way, we've seen stability it already ESP if you look at our.
Our fourg prices pretty stable over the last four quarters.
As a similar with automotive.
So ltd, but LBW a has declined as it gets into more volume, we're seeing you'll price downs and youre approaching.
Sort of low low $13 areas down to more towards $10.
What else Cws and.
I guess the extension of that question is what are your thoughts on mix have you seen a material changes in mix. This past quarter or do you anticipate a mix shift to I guess LBW way in 2020 versus where you were between 19.
We are expecting this we have a lot of.
We talked about this in our Investor day, we've seen we have a lot of a customer activity and our funnel for LP WH, So theres lots of.
Market interest in that the rollout of LP WJ has been somewhat slower.
Many of the carriers.
Have taken longer to complete their full.
Pwc rollout and then all of the features on LP W.A. like power saving mode. So that you can operate in the three to five year battery life on an L. Pwc module has to have networks of Florida, that's not have rolled up back in vigorously yet we're seeing big improvements in global coverage by the end of this year and continuing throughout 2020 and so we.
We will see continued increase in L. PW way, we think LBW way over the coming.
Three to four years of grows dramatically and volume to.
Several hundreds of millions of devices per year as that becomes more mainstream and more.
Supported by carriers globally. So we're on the very front edge of LBW way and the volume from our module perspective, you can see that is being lower revenue, but our real attack point here is modules blas.
Recurring revenue services, so the LTV of a.
Design win with LBW way can actually be very strong for us, even though the hardware component of it as much lower.
And Paul I'd also add well not a module comment you other parts of our hardware business that are in the Aiotv solutions segment, such as our gateways are also growing fairly rapidly we saw 14% year over year growth in that product line that hardware product line and that comes at a fairly high margins fall mid 50.
Yes.
Okay.
Thats helpful. The one last one from me somewhat of a clarification question just in regards to the recurring.
Services growth you mentioned is 7% year over year. This quarter I think last quarter. It might have mentioned is 12% is that the bright apples to apples comparison, and then you didn't mention it grew 3% quarter over quarter, but it does look like year over year growth.
Elevated.
What's sort of the moving parts between the quarters. It can help walk us through that.
Sure I mean, let me make some comments and I'll ask Dave to way and so we have we had expected some of the businesses that we acquired such as the.
Vertical businesses out to add Numerex and some of the businesses in Scandinavia from the main gate aren't areas that we're actively trying to grow so there's been some.
Declines there and Thats why I brought smart Sim.
Our strategic adding services to our devices is growing very strongly so there is a bit about transition is the the growth engine to the future and those design wins I talk about we'll all be part of those growth engines are accelerating and holding back some of that growth is.
The old legacy businesses, which.
Make up a good part of 100 million today, but are not part not a big part of our 200 400 million because we're not growing those areas.
And just too just to follow up Paul So if you look at.
I will speak about the recurring portion of our services business. It grew about.
6.9% in Q2 year over year as well.
Thank you that that's helpful Thats one.
Your next question comes from Richard fee of National Bank. Please go ahead. Your line is open.
Thank you so as we look at the next 12 months what else are the major operating initiatives here to sort of drive that recurring revenue component.
Of your base here.
Sure Hi, Richard Cantera.
We.
We're pretty much right across the board I have the company focused on on attaching recurring revenue to our devices and.
So I'll I'll refer to a few programs have significant here.
Starting with our our smart Sim so our smart Sam.
Selects the strongest network signal in over 200 countries globally, and so as we add that to our products.
It simplifies the journey for the customer because they don't have to independently be testing and verifying with different carrier stems around the planet and with our device and hardware. Both managed by our 24 by seven network operating center, we provide a one point of contact to help those customers manage the second step up in our Mark.
Integrated products, where we instead of having a discrete Sam which we have with our smart Sim. We're now building directly into our modules in gateways embedded Sierra wireless conductivity so without.
Even having their requirements for installing a sim card to smart Sim technology is built right into the product.
And and pre integrated in pre tested so thats. The next level of of integration and we've just started shipping that product. This year, we're rolling it out across our portfolio and that's going well and in the third and most integrated approach is our octave products. So we GA that product a general availability in October we.
Signed up a first handful of customers already including one that we have done end to end with Microsoft and so octave has the connectivity and security built in directly from device to cloud.
We take the sensor data from the edge, we converted two events and we just charge the customer per events there not even looking at per megabyte charger those sorts of factors, it's proven to be very.
Very appealing to customers had.
Lots of very strong positive feedback from customers at our innovation summit last month, what they're seeing how great benefits one very large industrial customer was reviewing it in the renovation department.
And they were complaining that the the marketing department and got a whole debated before they signed a deal with US they were busy marketing it to all of their division. So it's it's a simplification of the implementation of Aiotv. The Forrester research that we mentioned said that customers can get to market 12 months faster and say, 45% of their development cost with octave.
So those are three areas of focus for us little looking to attach service to as many of our I O T solutions modules and gateways as possible leveraging ready to connect as a customer benefit and industrial aiotv in particular to leverage octave across the board.
And I would finally added in our enterprise segments will be run enterprise Gateway Ferrara enterprise networking customers.
We have a comprehensive.
Software stock as well to help them manage their network in device and we've been increasing our attach rate of that product in recurring revenue from the software level. In addition to the connectivity level.
I would also at our managed connectivity services also a focus to grow as well, where we where we bundle up a gateway with connectivity to provide services to enterprises.
Yes, I guess I'll tell you guys have all the products there I guess I'm more curious on those on the sales side in like as a direct approach the writer approach or any expand the channel partners like.
So the numbers are you guys want I get too.
It's got to be a massive acceleration so I'm kind of curious to see what you're doing on that channel or sales side.
Well it.
I will answer that question and when you say massive acceleration when you delighting customer we referenced in the in my script here.
100000 devices and $10 per LP WH device.
It's about a million dollars revenue, but the recurring revenue from those as they get deployed is over twice that amount per year. So it's actually there is.
Theres a theres a significant.
Value ongoing value creation.
A million one time on hardware to millions annually.
So that's how that's how the recurring revenue side starts to add up dramatically as you add more customers, but on the sales go to market approach first of all we've done a lot of training Q3 was a particularly heavy training quarter of training all of our.
Salespeople and and partners the channels, we go through on on adding services to our devices and then secondly partnerships like Microsoft are absolutely key.
And a big part of the.
Microsoft partner ecosystem is Catseye partners that.
Our our I trains and leverage to sell as your products and that being said, we've become part of that ecosystem.
As we were in the in the Microsoft partner program. So.
Enhancements off of our existing direct salespeople leveraging our current channels and then adding new partners like Microsoft or the three areas that we're driving our service attach.
Okay, and one last one for me.
Yes, I know that you didn't want to talk about guidance for 2020, but.
Yes.
Sorry, I fly a bit blind here.
For next year I'm trying to understand we look of the recurring piece, what's the progression like is at a steady progression or is that something that will kind of.
Really accelerate.
Going into the end at 2021 like if you can kind of give us some guidelines in terms of how we should model that I think that's very helpful for all of US here on the line.
Hi, it's Dave here I want to be careful we're not we're not going to talk or provide guidance for 2020 here on this call I think we did provide some some trends that I think could be useful such as uli a growing trend in our services.
Business grew 7% year over year in in Q3, I think you'll see that accelerate into 2020 and drive stronger growth that way I think you'll see our gateway business accelerated as well.
And and overall drive.
Decent growth and in I O T solutions, we will give some of that backfill with with embedded broadband, particularly with having completed shipments here in the near term to the big tier one PC Oems.
We do have a whole to fill in 2020 with respect with respect to that.
Okay. Thanks.
We have completed the allotted time for questions I will now turn the call back over the presenters for closing remarks.
Okay, well. Thank you very much and we'll have follow up calls with many look forward to discussing our continued transformation and.
We work to bring more data points forward and we will continue to do so so hopefully this helps I understand the transformation that we have to origin Aiotv solutions company. Thank you for your time. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.